How St. Jude Hopes to Cut Into Medtronic's Pacemaker Dominance

The pacemaker industry is a mature market, offering single-digit growth in the United States. But that growth may accelerate as a longer-living population and aging boomers drive demand higher. That would be welcome news for market leader Medtronic (NYSE: MDT  ) .

The company has a stranglehold on the industry, controlling more than 50% market share.  It's also good news for St. Jude (NYSE: STJ  ) and Boston Scientific (NYSE: BSX  ) , the #2 and #3 players in the market, respectively -- especially, if they can out-innovate Medtronic.

Getting bigger every day

Globally, more than 3 million people are living with implanted pacemakers, and about 1 million are implanted every year.  That number is likely to climb substantially as large populations in emerging markets live longer and gain access to better health care.

While the market for pacemakers is highly penetrated in the U.S. and Europe, it's growing by the low double digits in emerging markets, including China. That has analysts expecting that pacemaker sales will grow to $5.1 billion a year, or a compounded 11% annually, over the next five years.

Breakthrough technologies

One of the biggest advances in pacemakers is the use of micro-electro-mechanical systems, or MEMS, to create smaller, more controllable devices. These MEMS-built pacemakers are cheaper and less invasive than their predecessors.

That's allowing manufacturers to reimagine the lead, which delivers the impulses created by the pacemaker to the heart through a vein. Those leads can deteriorate over time, or get displaced.  It's also allowing for advances in extending battery life beyond the five or 10 years associated with prior-generation pacemakers.

Those advances are increasingly trending toward devices small enough that they can be placed directly on the heart wall, eliminating the need for leads and reducing battery power consumption.  Even further out, batteries may conceivably be eliminated altogether, as technologies develop that allow pacemakers to be powered by the patient's body instead.  

Leveraging technologies for growth

Medtronic recently released data from a two-year study of its latest-generation EnRhythm pacemaker, showing it did a better job at preventing the permanent irregular heartbeats known as atrial fibrillation, which can lead to an increased risk of stroke.

The EnRhythm pacemakers are designed to kick on when needed, rather than supply a continuous stream of electronic pulses. Historically, continuous pulses weaken the patient's heart, suggesting that new technology may offer a compelling and more margin-friendly reason for doctors to embrace Medtronic's latest products, including the Advisa MRI Pacemaker system, which won FDA approval this past February.

The Advisor MRI also incorporates technology allowing patients to have future MRIs, eliminating a disadvantage of earlier systems, which prevented implant patients from getting future MRIs for fear of damaging the implant.

Boston Scientific has a similar product in its Ingenio and Advantio pacemakers, which both received FDA approval last year. The devices offer a RightRate technology that modulates heart rhythm based on rising or falling demand, such as when patients exercise or sleep. Those devices also integrate monitoring technology that can transmit heart rate data to doctors in-between patient visits. Boston Scientific also started a study earlier this year for an MRI-safe pacemaker.

Meanwhile, the recent acquisition of Nanostim may make St. Jude the most intriguing of these three companies. The deal brings along Nanostim's miniaturized pacemaker, which can be implanted directly into the heart without the need to surgically create a pacemaker pocket, and without those troublesome leads.  The retrievable device is powered by a battery with an expected lifetime of more than nine years. The device's size, lack of leads, and long battery life provides surgeons with a less invasive, and possibly less risky, surgical option that St Jude thinks is compelling enough to warrant a purchase price of as much as $188 million, if milestones are met. 

The Nanostim device, which will be the first leadless pacemaker commercialized, won approval in Europe, and St. Jude expects to start selling the pacemaker there early next year. The device also has conditional FDA approval for an investigational device exemption here in the United States.  As a result, St. Jude will start enrolling patients in a trial during the first quarter, and hopes to file for approval later in the year. The launch and potential approval in the U.S. are important, given that St. Jude's sales of pacemakers fell 5% from last year in the third quarter.

A Foolishly brighter future
Heart disease is the leading cause of death in the U.S., taking nearly 600,000 lives each year.   And while pacemakers aren't suitable for everyone -- roughly half of heart attack patients are deemed appropriate -- new technologies are changing the game in how patients and doctors view pacemakers and their role in treating heart failure patients.

Couple that innovation with the trend toward a longer-living global population, particularly in emerging markets like Asia and Latin America, and you get a nice runway for future sales and profit for manufacturers Medtronic, St. Jude, and Boston Scientific. 

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